Published Articles by David Balovich
This is the ninth installment in a continuing series on financial statement
The offset to assets is liabilities. Liabilities, from the word liable, represent the
obligations that a firm has to outside creditors. Although there generally is no specific
one-on-one matching of certain assets with certain liabilities, the assets taken as a
whole represent the resources available to pay the firm's liabilities.
The most common liabilities are money owed to suppliers, employees, financial
institutions, bondholders, and the government.
There are generally two basic types of liability - current and long term.
Current liabilities is anything that is due and payable within a twelve month period. This
would include suppliers, current portion of long term date (due within twelve months),
taxes owed the government and any accruals.
Long Term Liabilities
Long term liabilities is any debt that is owed for longer then twelve months. These would
include debt owed to financial institutions that have a maturity date greater then one
year, debt owed to bondholders, deferred compensation and any other debts that are due
beyond a twelve month period.
Valuation of Liabilities
Valuation of liabilities dose not cause nearly as many problems as valuation of assets.
With assets, we have the problem of how to value the property or equipment. With
liabilities if we owe Richard forty dollars, it is not hard at all to determine what our
liability is, it is forty dollars.
Contingent liabilities are those liabilities that may be owed by the firm but the payment
depends on some action that determines the firm actually owes the money. The most common
contingent liabilities are those that may result from a lawsuit or an audit.
If an airline has an accident it may be liable to its customers for payment resulting in
death, injury and loss of personal belongings. That will be determined by the NTSB through
its investigation. During that period the airline has a contingent liability. They are
required by GAAP to report the contingency amount in their notes but they are not required
to list the amount under liabilities on their balance sheet until it is determined that
they are in fact liable (remember one of the accounting criteria when it comes to
statement preparation is materiality).
One of the questions that should always be addressed when reviewing liabilities is: Are
there any contingent liabilities? If there are these should be added to the liability
section by the analyst.
I wish you well.
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